The insured operated a truck repair business. In June 2016, the insured's place of business sustained damage due to failure of several trusses providing structural support to the building's roof. The failure was due to latent construction defects leading to an insufficient load bearing capacity. The roof began to sag while one of the walls bulged outward due to the sudden pressure overload. The insured hired a construction firm to install temporary shoring to support the roof and prevent further damage. All of the building's walls remained standing and, although the roof sagged, it also remained intact. However, the building could not be safely occupied until repairs were completed.

The insured submitted a claim to Auto-Owners under a property casualty and liability policy. Collapse was covered under the Additional Coverage section of the policy. But the policy required the collapse to be "abrupt." meaning an abrupt falling down or caving in of a building or any part of a building, rendering the building unfit for its intended purpose. The claim was denied on the ground that the damage was not a covered "collapse" under the terms of the policy.

The insured sued and cross motions for summary judgment were filed. The trial court concluded that the building had neither fallen down nor caved in, as it was still standing. Therefore, there was no collapse.

The appellate court affirmed. Although one of the walls of the building bulged outward and the roof sagged, they nonetheless remained intact. While the roof may have been in imminent danger of caving in were the shoring to be removed, the policy excluded from coverage any part of a building that was simply in danger of falling down or caving in.

During a thunderstorm, a large tree fell onto the roof the insured's house, causing significant damage. The damage was reported to their insurer, Georgia Farm Bureau Mutual Insurance Company. When there was disagreement on the amount of the loss, an appraisal was invoked. An award was agreed to and payment was made by Georgia Farm.

The insureds then sued Georgia Farm, seeking compensation for diminution in value. The complaint alleged that the value of the house was diminished by a cracked foundation caused by the falling tree. In support of the claim, the insureds filed the affidavit of George Hall, the contractor who had repaired the house. He opined that the value of the house was diminished by the foundation being cracked. During a deposition, Hall testified that the house had lost 25 percent of its value due to the cracked foundation.

Georgia Farm filed a motion to exclude Hall as an expert witness and a motion for summary judgment. The court entered an order granting the motion to exclude Hall's testimony as an expert. The court also granted the summary judgment motion because there was no other evidence that the diminution in value of the property was not included in the amount of loss determined under the appraisal clause.

On appeal, the appellate court agreed that Hall's testimony as an expert was properly excluded. His estimation of the diminution in value of the property was not based on any market comparisons or related methodology. When asked to explain how he determined the amount of the value diminution, he said that he had made the determination based on his experience. So this portion of the trial court's order was affirmed.

The trail court erred, however, in excluding Hall's testimony as a lay witness. The record demonstrated that Hall had an opportunity to form a reasoned opinion as to the value of the house. In his affidavit, Hall stated that he was a licensed contractor. He was experienced in home building and remodeling. He was familiar with the costs of construction and the valuation of homes based on his professional experience. He had repaired the insureds' home. The house had suffered massive structural damage due to the fallen tree. The crack he observed affected structural integrity of the home because the slab foundation would never be as strong as it was before the crack. Further, such structural damage to a house's foundation caused the loss of value.

This evidence demonstrated that Hall was qualified to give an opinion as a lay witness on the amount that the foundation damage diminished the value of the property. Therefore, the trial court's order excluding Hall's lay witness opinion testimony was reversed. The order granting Georgia Farm's motion for summary judgment was likewise reversed.

August 25, 2018

On August 21, 2018, with Hurricane Lane approaching, the Hawaii Insurance Commissioner issued a declaration allowing out-of-state independent adjusters to assist with claims for thirty days. The declaration is here. The adjuster must be licensed in a state with similar licensing requirements as Hawaii. Hopefully, the addition of more adjusters will assist insureds process claims more quickly after loss from Hurricane Lane.

Insureds are advised to carefully check the credentials of any out-of-state independent adjuster they may hire.

August 22, 2018

The Fourth Circuit certified the following question to the South Carolina Supreme Court: Does South Carolina law support application of the "at issue" exception to the attorney-client privilege such that a party may waive the privilege by denying liability in its answer? In Re: Mt. Hawley Ins. Co., 2018 U.S. App. LEXIS 17910 (4th Cir. June 28, 2018).

Mt. Hawley insured Contravest Construction Company under an excess commercial liability policy from July 21, 2003 to July 21, 2007. During this period, Contravest constructed a development in South Carolina. In 2011, the Owners Association sued Contravest for alleged defective construction. Mt. Hawley denied tenders to defend or indemnify. Contravest ultimately settled the case.

Contravest and the Owners Association then sued Mt. Hawley, alleging bad faith failure to defend or indemnify, breach of contract, and unjust enrichment. During discovery, the plaintiffs requested Mt. Hawley's file on Contravest's claim for excess coverage relating to the development suit and later, Mt. Hawley's files relating to all of Contravest's claims under its excess liability policies. Mt. Hawley contended that these files contained material protected by the attorney-client privilege, and produced the files in redacted form with accompanying privilege logs. The plaintiffs filed multiple motions to compel, arguing that Mt. Hawley waived the attorney-client privilege as to these files.The district court granted plaintiffs' motions to compel and ordered Mt. Hawley to produce the files for in camera inspection. Mt. Hawley then sought a writ of mandamus from the Fourth Circuit to vacate the district court's order granting the motions to compel.

Mt. Hawley challenged the district court's holding that the relevant files were not protected by the attorney-client privilege because Mt. Hawley put them "at issue" in the case by denying liability for bad faith failure to defend or indemnify. The district court relied upon a prior case holding that if the insurer voluntarily injected an issue in the case, the insurer voluntarily waived the attorney-client privilege. City of Myrtle Beach v. United Nat. Ins. Co., 2010 WL3420044 ( D.S.C. Aug. 27, 2010). In Myrtle Beach, the insurer failed to meet its burden of establishing the absence of waiver of the attorney-client privilege on account of the defenses asserted in its answer, including that the insurer acted reasonably and in good faith.

Here, the district court found that Mt. Hawley denied bad faith liability, thereby waiving the attorney-client privileged with respect to he attorney-client communications in the claim files, to the extent such communications were relevant Fed. R. Civ. Proc. 26. The court thus ordered Mt. Hawley to produce the files for in camera review.

Mt. Hawley contended that if South Carolina law did not support the "at issue" exception, the district court's order granting the motions to compel was erroneous. The Fourth Circuit agreed. Therefore, the issue was sent to the South Carolina Supreme Court by way of the certified question.

August 20, 2018

The Second Circuit reversed the District Court's issuance of summary judgment to the insurer because a windstorm exclusion was deemed ambiguous. 7001 East 71st Street, LLC v. Continental Cas. Co., 2018 U.S. App. LEXIS 17334 (2nd Cir. June 26, 2018).

A windstorm during Hurricane Sandy caused the roof of 7001 East 71st Street LLC (7001) to tear, allowing rainwater to seep in and damage 7001's "Covered Equipment" as defined by the policy. Continental denied coverage based upon the windstorm exclusion and the district court granted summary judgment to Continental.

The policy's Windstorm Exclusion followed an anti-concurrent causation clause which read, "We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded, regardless of any other cause or event that contributed concurrently or in any sequence to the loss." The section then listed numerous items, including "earth movement," "an explosion," etc. Another exclusion read, "A Breakdown that is caused by windstorm or hail." The policy defined a "Breakdown" as a "sudden and accidental direct physical loss to 'Covered Equipment,' which manifests itself by physical damage, necessitating its repair or replacement, unless such loss is otherwise excluded within this Coverage Form."

The Second Circuit found notable that the exclusion did not simply read, "we will not pay for loss or damage caused directly or indirectly by windstorm." The language of the windstorm exclusion was distinguishable from, for example, the policy's Earth Movement Exclusion, which - read in context- stated, "we will not pay for loss or damage caused directly or indirectly by earth movement." If the Windstorm Exclusion simply stated,"we will not pay for loss or damage caused directly or indirectly by windstorm,' it may have barred 7001 from indemnification in this case because the damage was caused directly or indirectly by windstorm.

But Continental drafted the Windstorm Exclusion differently than the Earth Movement Exclusion. A person could read the Windstorm Exclusion as saying that Continental "will not pay for loss or damage caused directly or indirectly by a 'Breakdown' that is caused by windstorm." But another fair reading of the exclusion would be "if a 'Breakdown' that is caused by windstorm occurs, Continental will not pay for loss or damage that such a 'Breakdown' directly or indirectly causes." When inserting the policy's definition of "Breakdown" into the exclusion, the language read, "We will not pay for loss or damage caused directly or indirectly by . . . a sudden and accidental direct physical loss to 'Covered Equipment' that is caused by windstorm . . ." This language meant that the broad exclusion applied only when a windstorm directly caused damage to Covered Equipment, and not when a windstorm indirectly damaged Covered Equipment. This reasonable reading made it at least ambiguous whether the exclusion applied.

Therefore, the District Court's judgment was vacated for further proceedings.

August 15, 2018

The Fifth Circuit reversed the district court's dismissal of the insured's complaint by granting the insurer's motion for judgment on the pleadings. Spec's Family Partners, Ltd. v. Hanover Ins. Co., 2018 U.S. App. LEXIS 17246 (5th Cir. June 25, 2018).

Spec's was a specialty retail chain that accepted payments from major credit card brands like MasterCard and Visa. Spec's had a Merchant Agreement with First Data Merchant Services, LLC (First Data), a company that processed credit and debit card transactions in exchange for a fee.

Between October 2012 and February 2014, Spec's credit card network was hacked by unknown criminals, resulting in First Data's having to reimburse issuing banks the costs associated with the fraudulent transactions. First Data demanded payment from Speci's in a letter dated December 16, 2013, in the amount of $7,624,846.21. A second demand letter was sent by First Data on March 25, 2015, seeking $1,978.019.49. Both demand letters mentioned the establishment of reserve accounts to assure reimbursement and compliance with indemnification obligations by Spec's under the Merchant Agreement.

N. "Loss" on account of any "claim" made against any "insured" directly or indirectly based upon, arising out of, or attributable to any actual or alleged liability under a written or oral contract or agreement. However, this exclusion does not apply to your liability that would have attached in the absence of such contract or agreement.

In response to the demand letters, Hanover agreed to defend under a reservation of rights. To recover the money First Data withheld in the reserve accounts, Spec's filed suit. Although Hanover initially paid expenses associated with the litigation against First Data, it eventually refused to do so, taking the position that the expenses were not "defense expenses" because they were incurred in pursuit of an affirmative claim against First Data.

Spec's sued Hanover. Hanover moved for judgment on the pleadings, asserting that Exclusion N relieved it of any duty to defend or indemnify. The district court granted Hanover's motion based upon Exclusion N which precluded coverage because the claim arose out of the Merchant Agreement.

The Fifth Circuit reversed. The pleadings, viewed in the light most favorable to Spec's, did not unequivocally show Exclusion N excused Hanover's duty to defend under any set of facts or possible theory. The demand letters from First Data included references to Spec's "non-compliance" with third-party security standards and demands for non-monetary relief, wholly separate from the Merchant Agreement. Spec's allegations included statements in the demand letters that did not depend upon the Merchant Agreement, such as Spec's negligence in not complying with the Payment Card Industry Data Security requirements and demands for non-monetary relief not contemplated by the Merchant Agreement.

The insureds' building collapsed in McComb, Mississippi. Pubic utilities were damaged and traffic disrupted. The City sued the insured, alleging that the building collapsed because there was too much water gathered on its roof. The City further alleged that the insureds knew too much water was on the roof because they had been told by someone hired to clean the drain that it was clogged and by a contractor that the roof was so damaged that it could not safely be repaired.

The insureds requested a defense from Hudson under a CGL policy and coverage under a commercial property policy. The policy provided that coverage was void if the insured committed fraud or intentionally concealed or misrepresented information. Hudson denied coverage and sued for a declaratory judgment.

The City executed an assignment with the insureds by which the City's claims would be made solely under the CGL policy. The City and the insureds counterclaimed against Hudson. They alleged that the policies covered the building's "unexpected" collapse, but that Hudson failed to fulfill its obligations under the policies.

Hudson's motion sought to dismiss parts of the counterclaim that went beyond the pleadings and were better resolved on summary judgment. The court determined that the counterclaim alleged facts showing an actual, present dispute regarding coverage under the policies. Nothing more was required under Rule 12 and the motion to dismiss was denied.

In February 2016, the insureds noticed a series of cracks throughout the basement walls of their home. The insureds believed the problem was due to tainted concrete, likely obtained from the J.J. Mottes Concrete Company, which had caused similar problems in homes throughout Connecticut. A chemical compound in the Mottes concrete would eventually cause the home to cave in on itself, and there was no known method to prevent the continuing deterioration.

The insureds sued Allstate when coverage was denied. Allstate filed a motion to dismiss.

The policy covered collapse, which required,

a) the entire collapsed of a covered building structure;

b) the entire collapse of part of a covered building structure; and

c) direct physical loss to covered property caused by (a) or (b).

For coverage to apply, the collapsed of a building structure specified in (a) or (b) above must be a sudden and accidental direct physical loss caused by one or more of the following:

Allstate argued that "sudden" meant a temporal abruptness of collapse that the case here did not present. But the policy covered collapse caused by "hidden decay" and "defective methods or materials used on construction," both of which were alleged here. Decay typically consisted of slow progressive decline, so the policy language was arguably inconsistent with any temporal abruptness requirement. All of the covered, gradual causes of collapse included thein policy necessarily occurred slowly until such time as there was a sudden revelation of a catastrophic nature. Here, the abrupt event at issued was the exposure of cracks demonstrating substantial impairment to the structural integrity of the home.

The court found that regardless of the exact scenario, homeowners should not have to wait for their home to fall to the ground to be eligible for explicitly included collapse coverage. The policy did not require a sudden "falling down." It required a sudden collapse, which the insureds had adequately alleged in their complaint.

Regarding the exclusion for defective construction materials, the additional protection coverage for collapsed superseded any contradictory general exclusions, and the policy could reasonably be understood to have contemplated coverage for a "collapse" that followed consequentially from otherwise excluded activity.

Allstate also argued that the building must entirely collapse. But "collapse" was sufficiently ambiguous to include coverage for any substantial impairment of the structural integrity of a building under Connecticut law. Beach v. Middlesex Mut. Assur. Co., 205 Conn. 246. Here, the insured alleged substantial impairment of the structural integrity of the home. The entire collapse of a home's foundation could be reasonably understood to be an entire collapse of part of the covered building structure in the sense that the foundation was completely, without limitation, suffering from the substantial impairment to its structural integrity.

The court was aware that in Karas v. Liberty Ins. Co., 2018 U.S. Dist. LEXIS 71844 (D. Conn. Apr. 30, 2018) [post here], a certified question had been posed to the Connecticut Supreme Court to determine what constitutes "substantial impairment of structural integrity" for purposes of applying the collapse provision to homeowners' policies. Depending on the answer to the certified question, substantial impairment of the structural integrity of the insured's home may have existed when the insured first noticed a series of cracks throughout their basement walls in February 2016.

Therefore, Allstate's motion to dismiss was denied without prejudice for renewal after resolution by the Connecticut Supreme Court of the definition of "collapse" within a homeowners' policy.

August 06, 2018

The Ninth Circuit upheld the District Court's decision that the insured Association of Apartment Owners was entitled to coverage for the attorneys' fees incurred [prior post here].Ass'n of Apartment Owners of the Moorings, Inc. v. Dongbu Ins. Co., Ltd., 2018 U.S. App. LEXIS 20251 (9th Cir. July 20, 2018).

The District Court for the District of Hawaii granted summary judgment to the AOAO, requiring Dongbu to indemnify the AOAO for an award of attorney's fees that an arbitrator ordered the AOAO to pay to the underlying claimants. The claimants prevailed on a claim that their condominium unit incurred water damage due to a common roof leak. Dongbu's policy required it to reimburse those sums that the AOAO was legally obligated to pay as damages because of property damage. The AOAO became legally obligated to pay the claimants' fees once the state court confirmed the arbitration award. Further, the water damage to the home constituted covered property damage under the policy.

The policy did not define "damages," but in the context of the policy, the plain meaning of "damages" encompassed the fees that the claimants incurred to vindicate their claim for water damage to their home, even if those fees were not a measure of the physical damage. The fees awarded to the claimants as the prevailing party thus fell within the meaning of "damages" under the policy.

The phrase "because of" connoted a non-exacting causation requirement whereby any award of damages that flows from covered property damage is covered, unless otherwise excluded. The fee award was properly considered an award of damages that the AOAO must pay "because of" that covered property damage and is not otherwise excluded.

Therefore, the District Court's judgment was affirmed.

Thanks to John Hall of Insurance Associates in Honolulu for sending me this decision.

Engineered Structures, Inc. (ESI) contracted with Fred Meyer Stores, Inc. to build a fuel center. The contract called for the installation of two underground storage tanks (USTs) for storage and sale of fuel. ESI contracted with 3 Kings Environmental, Inc. (3 Kings) to install the Liquid Fuel Distribution and Electrical systems.

The installation manual for the USTs called for the tank to be ballasted to keep the tank protected against flotation until the tank was fully backfilled and the top slab was in place. Ballast was a temporary element of the installation much like roofers use a tarp to cover an unfinished roof as the work progresses. When the work was complete, no water (ballast) was present in the tank.

Between December 15 and 17, 2015, the USTs were lowered into the ground, seated into bedding material, strapped down via anchor straps and partially backfilled with gravel. On December 23, 2014, it rained. On the morning of December 24, 2014, ESI and 3 Kings discovered that the larger UST had displaced the surrounding soils and emerged from the excavation. At that time the backfill was at least up to the top of the tank. By floating out of the backfill that surrounded it, the UST sustained damage, which required repair before the UST could be reinstalled, and delayed the project schedule. At the time of the loss, the UST had been lowered into the excavation and partially backfilled, but it had not yet successfully undergone post-installation testing required by the manual.

ESI incurred costs to re-excavate the hole and reinstall the UST. Further costs were incurred for having the UST inspected and repaired before it was reinstalled. All of the damage to the UST occurred because it floated.

On January 6, 2015, EST submitted a claim to Travelers under its builders' risk policy. Travelers had the site inspected. It was determined that the UST should have been filled with ballast, to a level of not more than 12-inches above the groundwater level in the excavation, following installation and partial backfilling. Travelers denied the claim based upon the policy's exclusion for faulty workmanship.

ESI sued for breach of contract and the parties moved for summary judgment. Travelers contended that the faulty workmanship provision precluded the claim because had it not been for the failure to properly ballast the UST, it would not have floated out of the ground. Travelers argued that, under either under a "flawed product" or "flawed process" analysis, the faulty workmanship exclusion was applicable. ESI responded that the faulty workmanship provision did not apply to a work in progress because the provision applies to a finished work product.

There was no dispute that the work was in complete because ESI had not completed ballasting the tank, nor had it completed the subcontract for installation of the Liquid Fuel Distribution & Electrical Systems, or the fueling station as a whole. Therefore, the faulty workmanship exclusion did not apply.

The policy covered resulting loss or damage, which may have been caused in part by the negligent practices of ESI. If Traveler's intent was to exclude liability from all losses caused by negligence by ESI, it was not clearly express in the policy. Instead, the policy excluded coverage for damage resulting from defective materials incorporated into the structure itself, or from defects in the produce caused by faults in the construction process.

Therefore, the court found the term s faulty workmanship ambiguous, and applied the construction most favorable to the insured. The UST sat in the ground without incident from the time it was filled with ballast on December 17, until December 24, when it rained. Under the flawed product interpretation, the exclusion did not apply because ESI's losses were not caused by a flawed product, but by failure to adequately protect against flotation during the installation of the USTs. This installation was a component part of he completion of the fuel center. ESI's motion for summary judgment on the breach of contract claim was granted.